So when do entrepreneurs get a chance to give tips to those all-powerful Keepers of the Checkbook? Hardly ever, is the answer. Offering honest feedback to a VC or angel investor ó†whether they've put money in or passed ó†can sour the relationship. Besides, aren't venture capitalists infallible?
TheFunded, of course, has collected anonymous ratings and comments about venture capital firms and individual partners since 2007. But after a serial entrepreneur e-mailed me earlier this month to vent about a local VC who had neglected to so much as visit his Web site prior to the meeting, I thought it might be a good idea to gather some feedback from Boston-area entrepreneurs, intended for Boston-area investors. (Though much of what they had to say probably applies to start-up investors anywhere.) My criteria: everyone I asked has been successful in raising money from angels or venture capital firms, so there's no hostility here from entrepreneurs who were unable to find backing.
I granted everyone anonymity,†since few entrepreneurs want to burn any bridges with VC firms or angel groups. Here's what they had to say. (And I posted my favorite response in its entirety on my "Read Scott's E-Mail" blog.)
- One software entrepreneur told me about a group of angel investors who visited his company, but decided not to invest. Instead, they began pitching their services as consultants. "I cannot stress this enough: The worst thing on this planet is a consultant disguised as an angel/VC. And they are everywhere. Atrocious."
- A serial entrepreneur who successfully sold his last two companies told me about a meeting last month with a Cambridge venture capitalist who spent most of their first meeting looking at his phone. "Our meeting was apparently an email-checking session," he wrote. "I wish I'd known; I could have gotten some work done."
- A serial entrepreneur working on a new mobile start-up complains about VCs who don't keep negotiations confidential. "I've had it happen where I was congratulated by someone thousands of miles away on receiving a term sheet from a firm ó†hours after I got it." (The term sheet outlines the details of a proposed investment.) "When an entrepreneur is in heavy negotiations with a VC firm, keep those negotiations private. The entrepreneur is."
- "A VC on Winter Street [in Waltham] was trying to convince me why his firm would be a great partner for my next venture. I commented that the disruption caused by sites such as Craigslist would impact traditional media and local advertising. His response was, 'Fascinating. Tell me more about this Craig's List.'" The meeting took place in 2002; Craigslist had been founded seven years earlier. "Why would an entrepreneur feel that this VC could add value, beyond money, if they don't even follow the domain closely?"
- "Answer our emails. Our memories are long, and weíre just getting started."
- An entrepreneur who successfully raised about $2 million last year writes, "One immediate VC behavioral problem jumps to mind: saying 'no' in a way that sounds like 'yes.' For example, VCs often end a meeting by saying, 'It sounds like you have an amazing product, and we'd be very interested in talking once you have more traction with some larger customers.' Then, once you return with more traction with some larger customers, the VC ends the meeting by saying. 'It sounds like you have an amazing product, and we'd be very interested in talking once you have more traction with some larger customers.' It's a cowardly hedge to say what the entrepreneur needs to do to get your interest, then to show no interest when they meet that goal. Instead, be honest, and say, 'Beneath my self-certain facade, I have no idea which companies will be successful and which won't. I missed Facebook and Google, and bet on some real losers. So, in case I'm wrong about you too, I'd like you to come back to me when you no longer need my money so I can jump on the train as it's leaving the station.'"
- One entrepreneur who recently sold a venture-backed company writes that she has to chuckle when a venture capitalist asks to see her business plan. "I have never met a VC that read my business plan. Ever. Even the ones who funded me didnít read it. What a waste."
- Several venture capital firms often band together as a "syndicate" to put money into a start-up. One entrepreneur writes, "In 2008, I was fortunate enough to have a VC who wanted to invest in my start-up. They wanted to create a syndicate, and introduced me and my chief technology officer to a large local VC firm. We visited this firm, and I asked if their diligence process was any different having come via a partnering VC. Their response was, 'We own the VC industry. We don't care who introduced you or who wants to invest with us. If we don't invest, you're dead.' Why would any entrepreneur want to work with that [jerk]?"
- A female entrepreneur who has raised about $1 million for her current start-up recalls trying to raise money for a previous venture. One investor, she says, "played 'Mr. I Was An Entrepreneur Too' to win our confidence. We trusted him and opened up. Once he figured out that we very short of cash, he lowered the valuation and changed terms on us because he figured we were desperate. We walked away and got money from another VC."
- "Donít say you are a cleantech investor unless you are actually investing in cleantech companies. We wasted a lot of time talking to VCs who werenít actually making investments in the space and lacked a fundamental understanding of the industry."
- Often, more senior VCs ask their less-experienced colleagues to screen prospective investments, especially when a company is run by a first-time entrepreneur with no strong links to the firm. One such entrepreneur writes, "I once had a call with a prominent seed stage firm in New York. I worked to get two separate intros to one of the partners, only to get bumped to a new associate. When we got on the call, first thing he asks is 'When is the site going to go live?' We already had several thousand customers and hundreds of thousands in revenue. Even though he was interested in recommending us on, I stopped the relationship there, because I didn't want to work with someone with that kind of judgment."
- "Itís a clichť already, but east coast VCs apparently like to show their prospective investees how important they are."
- "My VCs we great about the money, but over the ten years I worked with them, they did not send me one new client, one new strategic partner, one PR contact, or one new employee. Their website is all about how they add value, but they are basically finance guys. Well-intentioned, but just finance guys."
- After a VC firm had decided to invest in a company, but before they'd announced the deal, one of that company's competitors came in to pitch, writes one entrepreneur. "The VCs took the meeting 'just to learn more about the market and competitors,' which definitely crossed ethical bounds, in my humble opinion. I know the story because I knew one of the principals who subsequently left the VC firm. VCs maintain that they are ethically squeaky clean, yet when greed comes in the way, they breach their own ethical bounds."
- One entrepreneur selling a product whose sole purpose is to help save money in the transportation industry writes, "We can tell when you ask questions whether youíve actually paid attention to anything weíve said. For example, after describing how I can save a customer money, a VC asked 'so whatís the value proposition?'"
- One entrepreneur chastises "VC firms that sneak terms into the documents, or change things last minute. After a term sheet is signed by the entrepreneur, a VC might propose changes last minute during the quiet period (when the entrepreneur has agreed, in writing, to not seek out other suitors). This is a dirty, dirty trick and some first-time entrepreneurs get snared by it." Another entrepreneur tells me that he'd "had an investor try to renegotiate terms an hour before the closing, to squeeze a little more out of the deal."
- "I spoke to a 12-person angel group based in Portsmouth, NH. It was for a few hundred thousand dollars, and I ended up going to Portsmouth twelve times, talking to various individuals and sub-groups. They never said 'no.' The conversations just petered out. After that, I never spoke to any investors, angels, or VCs. Iíve decided that customers are the best investors."
- "As an entrepreneur, at the top of my list of VC losers are the folks who donít use the tools. If Iím a social media person and you donít use Twitter or Facebook Ö come on! I donít care how rich or old or experienced you are, it takes about one morning to figure out how to tweet. Ask the summer intern to show the senior partners wassup!"
- "The best VC meeting I ever had was one in which the partner said, 'You know, this isnít for me or my firm, and hereís whyÖ' Closure at the first meeting. I totally respected that. Look me in the eye and provide a well thought out, articulate decision. I totally respect that. What I donít respect is, 'Let me discuss this at my partner meeting on Tuesday.' What that really means is, (a) I didnít understand a word you said; (b) I canít make a decision by myself; or (c) Iím kind of a wussy and would rather break up via e-mail. All are unacceptable. Be a man and make a decision."
- "My angel investors took a lot of the early risk and have provided incredible value to get me to this point. If your [VC firm's] philosophy is to limit their involvement and crush their ownership position, please pass" on the deal, writes on entrepreneur who worked for several years at a VC firm. He adds, "If your deal structure or your board style will make me feel like an employee and not an owner, please pass."
- "Early stage (seed-level) VCs shouldn't be digging in to a conception-stage company's unit economics. If that's the kind of diligence you want to do, then invest at a later stage. At such an early stage, you're really betting on the market and the team (and perhaps the product). If you get those three things right, you'll find a way to make the economics work before you need to raise a later round of capital."
- "Over the years, I have come across a couple people who meet the stereotype of the newly-minted VC firm associate. They are usually about 27, just graduated from Harvard Business School, and have no experience in operations or creating a product, having spent their early career in management consulting or finance. But their inexperience is inversely correlated with their opinion of themselves. They think they are well qualified to pontificate and give stern advice on matters they don't yet fully grok. To these new associates, I would advise trying to remain humble, and to consider their interactions with entrepreneurs from the standpoint of, 'What can I learn from this person?' followed by 'How can I help?' After they've invested in a few successes, or, even better, created one, maybe they'll have more wisdom to offer." Another entrepreneur adds, "If you are junior, be fascinated! Ask the incisive questions! Do the analysis! Or at least, if you want to give us advice, be humble and consider starting a sentence with, 'You may have thought of this idea already, given that youíve been at this for a yearÖ'"
- "As a woman entrepreneur, I have to say I know many wonderful VCs and I appreciate and respect their help and intelligence most of the time, but shockingly there are the still the locker room slip-ups where Iím the only woman in the room [for a] meeting, and some guy thinks itís appropriate to tell a sexist joke. Hello!?" This same entrepreneur also shared an anecdote about a male partner at VC firm who couldn't figure out how to get a new LCD projector to work during a meeting. When his female assistant couldn't figure it out, either, "he spent a good 10 minutes in a board meeting completely demolishing [her] in front of the assembled crowd (all men and me.) ...He certainly did demonstrate how well he could abuse a woman, showing off what a boorish, nasty, butthead he was by treating this excellent woman in such an unprofessional way."
- Once a venture capitalist has invested in a company, he often takes a seat on the board, and chimes in on strategic or operational issues the company ought to approach differently. One entrepreneur writes, "Keep in mind that...this thing you have an opinion on, that I should do in a different way? Well I do it every freaking day. I get up, have my coffee, go to work, do this thing to best of my ability for 10, 12 hours consistently; then I go home, answer e-mail for a few more hours, and go to bed. Then I get up, and do it again. Then I get up really early, fly to Columbus, and do it some more. This does NOT mean I'm entirely right about the best way to do it. I know this. A little objectivity might be exactly what I need, to get the result we both want to achieve. But please... for the love of Pete... keep in mind when you tell me how you'd do it ó whether you have actually done it yourself or not ó keep in mind that I do it every freaking day, and that even if I could be doing it better, that deserves a little respect."
- A first-time entrepreneur who has raised nearly $5 million for her start-up writes, "My biggest concern for the health of the start-up economy is the avoidance of any kind of original thinking by VC's. It just isn't rational to fund the fourth, fifth or seventeenth copycat business. I love what Floodgate's Mike Maples and Ann Miuro-Ko say about their preference for funding non-conforming ideas because they usually turn out to be the biggest ones. They say if an company is a hot deal it is rarely a home run because it's not original enough. The real '10+ baggers' are the investments no one would touch ó†the ones they had to defend the first few years."
- Standing up for the honor of the venture capital industry was one entrepreneur whose company has raised north of $50 million. "I think they get a worse rap than they deserve," he writes.
What do you think?
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About Scott Kirsner Scott Kirsner was part of the team that launched Boston.com in 1995, and has been writing a column for the Globe since 2000. His work has also appeared in Wired, Fast Company, The New York Times, BusinessWeek, Newsweek, and Variety. Scott is also the author of the books "Fans, Friends & Followers" and "Inventing the Movies," was the editor of "The Convergence Guide: Life Sciences in New England," and was a contributor to "The Good City: Writers Explore 21st Century Boston." Scott also helps organize several local events on entrepreneurship, including the Nantucket Conference and Future Forward. Here's some background on how Scott decides what to cover, and how to pitch him a story idea.
May 16 & 17: Convergence Forum on Life Sciences
Speakers from Bristol-Myers, Millennium Pharmaceuticals, and Biogen Idec talk about the next ten years of the biopharma business. Plus, journalist David Ewing Duncan on radical life extension. (I'm hosting.)
May 22: MIT Sloan CIO Symposium
Chief information officers from Guess, Haemonetics, Intel and other companies talk discuss "architecting the enterprise of the future."
June 25: TEDxBoston
The oldest and biggest of the locally-organized TED events is back, at the Seaport World Trade Center. Tickets are free, but tough to get. Also streams on the web and airs on WBUR.